A 2005 cash budget is being prepared for the purchase of Toyi, a merchandise item. The budgeted data are as follows:
Cost of goods sold for 2005 $300,000
Accounts payable 1/1/05 20,000
Inventory – 1/1/05 30,000
12/31/05 42,000
Purchases will be made in 12 equal monthly amounts and paid for in the following month. What is the 2005 budgeted cash payment for the purchase of Toyi?
A. $295,000.
B. $300,000.
C. $306,000.
First, the budgeted annual purchases of the item must be determined, and then the budgeted payment amount is calculated.
Beginning inventory + purchases = ending inventory + cost of goods sold
$30,000 + purchases = $42,000 + $300,000
purchases = $312,000
Budgeted cash payment = accounts payable at 1/1/05 + (11/12)purchases for purchases in 2005
=$20,000 + (11/12)($312,000)
= $306,000
Only 11/12 of the 2005 purchases, i.e., the purchases made in the first eleven months, will be paid for in 2005 under the company's policy of payment for purchases.
D. $312,000.
This is the amount of purchases in 2005. Only 11/12 of that amount will be paid in 2005. The answer also fails to add in the beginning accounts payable amount, which must also be paid in 2005.
Correct Answer is C, with the explanations. Just a friendly reminder to carefully ready the entire question and not just skip to the last sentence like I did.
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